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Hello,
In many questions exams, it says the annual reinvestment needed to keep operations at their current levels is equivalent to the tax allowable depreciation.
Can you please clarify how do we proceed in this case. Example Chrysos Co March 2017 Q1.
2) b iii) Also, can you please explain how the examiner get 50% of 18458= 9229 and how the value of VCO is calculated?
Thank you
For you first question I do deal with this in my free lectures because it is something the current examiner does regularly.
You should remember from Paper FM (was F9) that we usually subtract the tax allowable depreciation in order to calculate the taxable profit. Then we calculate the tax, and then we add back the TAD because it is not a cash flow.
The AFM examiner does not add back the TAD because although it is not a cash flow, there is a cash outflow of the same amount in order to keep operations at their current level.
For your second question, we use the dividend growth formula as usual to determine the total value of $46,144M. The VCO is 40% of this and so is $18,458M. Because they now hold 40% instead of 20%, the value has increased by 20/40 of $18,458.
Thank you.
Another question:
Why the additional investment $1200 is not added back?And to calculate equity value of mining unit:
corporate value – NCL ( bank overdraft of 1800). CL payables 750 is ignored?I do not understand why you would want to add back the $1,200.
As far as the equity value is concerned, the total corporate value is equal to equity plus long-term debt. The overdraft was replaced by long term debt.
Sorry I mean deduct the $ 1200.
Isn’t it capital expenditure?
To get the cash flow don’t we have to deduct it?Thank you.
The restructuring is taking place immediately (and the 1,200 has been taken into account when preparing the new SOFP).
However for the equity value we are looking at future projected cash flows (i.e. after the restructuring) and the 1,200 does not affect the future cash flows.
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